529 Savings Plans: Are They Right For You?

July 17, 2002

If you are the parent of a newborn and hoping to send your child to Baylor one day, think about this: Using Baylor's current tuition rate ($15,700 a year) and an assumed (conservative) inflation rate in college tuition of 7 percent per year, by the time your child crosses the banks of the Brazos in 2020, it will cost you $53,064 per year. Multiply that by four, add a bit of inflation while your child is in college and you're looking at a cool quarter of a million dollars to get your child through college. And that's just for tuition. It doesn't count room and board, fees, books and other out-of-pocket expenses. 
For young parents -- and proud grandparents -- who can afford it, the federal government has a plan that you should consider immediately. The 529 Savings Plan, named for Section 529 of the Internal Revenue Code, was enacted in 1996 and substantially liberalized in 2001 and 2002 to give both income- and estate-tax relief to parents and grandparents who want to save for their children's and grandchildren's educations. 
Section 529 Plans offer the following advantages:

  • Tax-free earnings growth on the child's savings account
  • It is applicable at most institutions of higher learning (including both state and private colleges and universities)
  • You can change beneficiaries midstream or even skip generations to grandchildren (in case one of your kids turns out to be a genius and wins a free ride)
  • You can withdraw funds at any time (if not for an educational benefit, a 10 percent tax penalty applies), thus allowing the donor to maintain full control
  • Profits and dividends are tax-free if used for qualified expenses (including room, board, tuition, books and even transportation)
  • Under certain restrictions, you and your spouse can give $110,000 per year per beneficiary (especially good for grandparents) allowing you to "speed up" your contributions, front-loading them without using up any of your lifetime gift exemption, and potentially lowering your estate tax liability
  • The funds never pass out of the control of the donor (unlike gifts under the Uniform Gifts to Minors Act)

For more information, visit 
www.savingforcollege.com or contact your CPA or financial adviser. 

Dr. Thomas, BBA '69, MBA '71, PhD '78 (University of Texas-Austin) is the J.E. Bush Professor of Accounting in Baylor's Hankamer School of Business.